In house financing available

What You Need to Know About Closing Costs

So you’re ready to buy a house. Or are you? The selling price is not the only cost you need to prepare for if you are seriously considering making a home purchase. Often forgotten in the equation are the closing costs.

What Are We Talking About?

Closing costs are the fees paid at the closing of a real estate transaction, when the title to the property is transferred to the buyer. They are charged by lenders and third-party service providers. You will have to pay these in addition to the down payment on the home and any principal and interest related to the mortgage. It’s important to factor closing costs into your homebuying budget. (You can use this tool to figure out how much house you can afford.)

How Much Will I Have to Pay?

The exact cost will be difficult to estimate, but it’s a good idea to expect the total to be between 2% and 5% of the price you are paying to buy your home. This amount can either be financed with your loan or can be paid in cash, similar to your down payment. Your lender is required to provide a good faith estimate (GFE) of closing costs within three days of when you submit a loan application, but the GFE is subject to change by up to 10%.

What Charges Make Up the Total Closing Costs?

Closing costs vary based on things like where you are buying a home and your mortgage provider. Your total closing cost amount can be broken into lender charges, settlement services, and pre-paid and escrow costs. Lenders charge an origination fee for the service of getting you a loan and “points” that you may sometimes pay in exchange for a lower interest rate. The amount of these costs often depends on your credit. (You can see where you stand by taking a look at a free credit report summary from Credit.com.)

Settlement fees cover the administrative and legal work needed to finalize a home sale such as an appraisal fee, a credit report fee, flood certification, title services and lender’s title insurance, owner’s title insurance, home inspection, a survey, attorney costs, a government recording fee, transfer tax and all necessary postage or courier services.

The final costs of the closing process are amounts you have to pay in advance for items you will be paying regularly as a homeowner. This includes homeowner’s insurance, property taxes and daily interest. Some of these payments are placed in a special holding, or escrow, account that provides a reserve in case the deal falls through or you can’t pay at some point in the future.

When you are considering the total cost of home ownership, there are some things you can do to minimize closing costs — but understand they will rarely be completely avoidable.

AJ Smith is an award-winning journalist with more than a decade of experience in television, radio, newspapers, magazines and online content. She currently serves as the managing editor for SmartAsset.